While market “noise” and the potential long-term negative economic fallout from continued high wholesale natural gas prices shroud the merchant electric generation sector in a blanket of uncertainty, the admitted pro-coal-fired generation NRG Energy CEO, David Crane, said five-year forward wholesale gas prices in the $6-$7 range indicate liquefied natural gas (LNG) imports may not be the ultimate price-lowering savior some proponents expect.

Crane and senior executives from Dynegy and Calpine Corp. appeared on an independent power producers panel at the Merrill Lynch Global Power and Gas Leaders Conference Tuesday in New York City.

Robert Kelly, Calpine’s CFO, indicated he thinks that after “four long years, the power business is finally beginning to turn around,” but he acknowledged that continued rising wholesale natural gas prices — particularly for Calpine which has bet so heavily on gas-fired generation plants — is a continuing problem for the debt-laden San Jose, CA-based merchant plant developer/operator.

Dynegy CEO Bruce Williamson said one of the key drivers for the merchant power industry’s improvement is avoiding an economic slowdown, and continued $12-$13 natural gas prices could eventually cause a drop-off. While he thinks his company is positioned for any eventuality, location and operating performance will be keys for the independent power producers who succeed.

“To me the most important thing [in forward natural gas price curves] is not the steep rise in the front end, but the rise in the back end,” NRG’s Crane told the Merrill financial audience. “Gas now five years out is between $6 and $7/MMBtu. What this means to me is that the market now believes what we have long believed, and that is there is no validity to the idea that LNG is going to rise to the rescue somewhere in the 2008 to 2010 time frame, and bring natural gas into the $3.75 to $4 price range.

“From our point of view, it is just not going to happen. The big flaw in the argument, to me, is not just that LNG regasification facilities are hard to permit, but also that there is a huge demand for LNG worldwide, and the nemesis of American energy consumption — India and China — are going to rear their gigantic heads in the LNG field as well. (India announced an enormous purchase of LNG recently.) By the time the United States finally gets its act together and tries to lock down LNG supplies, I think they might find out that India and China are there ahead of us.”

Further exacerbating the shorter term gas situation is the impact of the recent hurricanes, and the question of how much longer term production will be lost. Crane said NRG’s analysis showed that before and after Hurricane Ivan last year, overall Gulf of Mexico production dropped from 12 Bcf/d to 10 Bcf/d, so he is wondering whether a similar drop-off, or worse, is in store for Gulf production this year.

“A lot of the production comes back initially, but then there is some that doesn’t come back at all,” said Crane, who thinks NRG is positioned well to take advantage of expansion of coal-fired and other non-gas-fired plants, such as its 700 MW coal plant in Louisiana, 20 miles north of Baton Rogue in an area that escaped the ravage of the recent storms.

For Dynegy, “in-market availability” of its power plants is the key, and that is how it attempts to gear its operations,” Williamson said. “On a long-term basis from a pure power generator’s perspective,” Dynegy has the upside of strong operational performance and it captures weather-driven spikes in key markets.

“The risk of the downside is an economic slowdown caused by $12 and $13 [per-MMBtu] natural gas, combined with mild weather and major unforeseen plant outages,” said Williamson, who likes his company’s “low-cost structure” in the Midwest and Northeast.

Calpine’s Kelly said for his company “the markets have not been really fair and open; it has been a real challenge at times selling to utilities who have had some of their own issues over the last few years. The development of ancillary and capacity markets, when you think of the independent power business, all we are is a third-party subcontractor that offers a better alternative to building your [a utility’s] own power plant. Utilities, for the most part, have not built generation for a long time; that is our business.’

Calpine will step aside in places where utilities demonstrate they can build plants cheaper and better, said Kelly, but the company continues to do “extremely well” in open market requests-for-proposals “when the playing field is level with fair and open competition.” From Calpine’s perspective, that has not always been the case in recent years.

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